Weak Q2 may be a sign of things to come

Global economic activity might have contracted slightly in Q2, which would be the weakest outcome in recent history aside from the height of the pandemic and the Global Financial Crisis. Part of the weakness reflects a likely slump in Russian GDP, but we also anticipate quarterly declines in the euro-zone and UK while the Chinese economy will have contracted amid ongoing virus restrictions. The US is a bright spot and available data point to a rebound in GDP after Q1’s disappointment. But even there, there are some signs that policy tightening is beginning to take a toll on interest rate-sensitive spending. With inflation still high and given few signs that underlying price pressures are easing, financial markets have moved to price in more aggressive interest rate hikes (similar to our own forecasts), which will weigh on activity in future.